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Briefing highlights

Coronavirus could spark earlier rate cut

BA suspends direct flights to China

Stocks, Canadian dollar, oil at a glance

CP Rail profit climbs

Boeing expects huge costs from 737 Max groundings

EU nations can restrict, ban high risk 5G providers

What to expect from the Fed

Earnings on tap: Microsoft, Boeing, Tesla

What analysts are saying today

Required Reading

BoC could ease sooner: Scotiabank

Bank of Nova Scotia believes the central bank could trim interest rates this year faster than it did during the SARS crisis of 2003.

How the Bank of Canada reacts depends on the economic impact of the spreading Wuhan coronavirus, though monetary authorities had already left the door open to a rate cut.

“The Bank of Canada may be more likely to ease sooner under a coronavirus shock than was the case with SARS when they waited several months until July to cut,” said Derek Holt, Scotiabank’s head of capital markets economics.

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“To be clear again, the early stages of this shock are not a major driver of our rate call by any means, but it could well tip the balance in terms of timing it,” he added. “Key is that the comparative starting conditions into the two shocks in 2003 and now are important.”

Spare capacity in the economy is also bigger now, he said, while inflation is lower now than it was then.

“The BoC could afford to bide its time in 2003 more so than now where a coronavirus shock would add to an already decent case for easing that wasn’t really there beforehand in 2003.”

Bank of Canada Governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues have held back from cutting their key rate, which stands at 1.75 per cent, as other central banks have rushed to trim theirs.

In a report Tuesday, Toronto-Dominion Bank chief economist Beata Caranci did not suggest the Bank of Canada or the U.S. Federal Reserve would cut rates in response to the coronavirus, but said that “if pushed, both central banks also have the greatest scope to provide additional monetary support relative to peer regions in Europe and Japan."

Bank of Montreal chief economist Douglas Porter noted, too, that “there’s little debate that a big new shock to global growth could easily prompt the bank to trim rates.”

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He did not specifically refer to the coronavirus but suggested the recent dive in oil prices, which was sparked by virus fears, “ramps up the pressure” on Canada.

“Given that monetary policy works with a long lag and the experience of previous outbreaks suggest that any negative effects on the economy are likely to be short-lived, at this stage we are not convinced that the virus will have much sway on the bank’s policy setting,” Mr. Brown said, adding he expects the central bank to hold steady this year.

Estimating the effect of the coronavirus on the economy “would be purely an exercise in speculation” at this point, said TD’s Ms. Caranci.

“What we can say is that if this coronavirus does follow a similar path as SARS, the impact on Canada and the U.S. would be limited to 0.1 percentage points or less,” she said. “This is quite small, although there would be distributive impacts.”

BA suspends direct flights to China

From Reuters:

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British Airways has suspended all direct flights to and from mainland China, one of the biggest names in aviation to do so, as worries grow about the impact of a spreading coronavirus on global travel.

BA.com, the airline’s website, shows no direct flights to mainland China are available to book in January and February, but the airline said in an email that the cancellations were in effect until Jan. 31 while it assesses the situation.

Direct flights to the Chinese-ruled autonomous region of Hong Kong were unaffected.

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Boeing expects huge costs from 737 Max groundings

From Reuters: Boeing Co. expects nearly US$19-billion in costs related to the grounding of its 737 MAX jets, the U.S. plane maker said Wednesday while posting a surprise loss and indicating it would cut production of its bigger 787 Dreamliner aircraft. The company reported negative free cash flow of US$2.67-billion for the fourth quarter ended Dec. 31, compared with a positive free cash flow of US$2.45-billion a year earlier. Core operating loss was US$2.53-billion, or US$2.33 per share, compared with a profit of US$3.87-billion, or US$5.48 per share, a year earlier.

EU countries can restrict or ban high risk 5G providers

From Reuters: EU countries can restrict or ban high-risk 5G vendors from core parts of their telecoms networks, according to new EU guidelines announced on Wednesday, a move likely to hurt China’s Huawei Technologies but unlikely to appease the United States. The non-binding recommendations, agreed to by the bloc’s 28 countries, seek to tackle cybersecurity risks at the national and EU levels, with concerns mainly focused on Huawei, although the guidelines do not identify any particular country or company.

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Lee to buy Berkshire papers

From The Associated Press: Lee Enterprises will buy Berkshire Hathaway’s BH Media Group publications and The Buffalo News for US$140-million, the company said Wednesday. The deal covers 30 daily newspapers in 10 states as well as 49 paid weekly publications with digital sites and 32 other print products. As part of the agreement, Lee will enter into a 10-year lease for BH Media’s real estate. Lee has been managing the BH Media publications since July 2018.

GE profit climbs

From Reuters: General Electric Co. reported a 30-per-cent jump in quarterly profit, boosted by its aviation business, but forecast 2020 profit below estimates. Earnings from continuing operations attributable to GE shareholders rose to US$663-million in the fourth quarter ended Dec. 31 from US$509-million a year earlier. Earnings per share from continuing operations rose to 7 US cents from 6 US cents. On an adjusted basis, GE earned 21 US cents per share.

French consumer confidence rises

From Reuters: French consumer confidence rose unexpectedly in January despite major strikes against pension reform grabbing headlines and causing transport chaos through much of the month, a monthly survey showed. The INSEE official statistics agency said its monthly consumer confidence index rose to 104 from 102 in December, when it hit the lowest level since July as massive transport strikes erupted.

What to watch for today

The Federal Reserve isn’t expected to change policy this afternoon, but markets will be parsing the language of the U.S. central bank for clues.

Several major companies are also reporting their quarterly results, including Microsoft, Facebook and Tesla.

“Having just recently become one of many tech giants to hit a US$1-trillion valuation, the company’s transition from PC hardware and software into cloud technology has helped it turbo charge revenues in the past few years,” CMC Markets chief analyst Michael Hewson said of Microsoft.

Where Tesla is concerned, its stock price has been on a roll.

“The turnaround in the Tesla share price in the past four months has been nothing short of astonishing,” Mr. Hewson said.

“If Tesla is able to deliver anywhere near 100,000 cars in Q4 it will meets its target, while the recent opening of its China factory could well turbo charge production further in 2020,” he added. “The opening of the factory in China has helped propel the share price through the US$500 level.”

What analysts are saying today

“Investors are foreseeing an end to the coronavirus outbreak just around the corner by buying shares and other risky assets while shunning haven assets that have outperformed in the last few days. Whether its too early to do so is quite another matter. Markets tend to move before the information can be confirmed.” Jasper Lawler, head of research, London Capital Group

“Apple shares will be in play today as the group posted impressive quarterly numbers after the closing bell last night. The tech giant posted a 9-per-cent increase in revenue to US$91.8-billion, which topped the US$88.5-billion forecast. [Earnings per share] were US$4.99, and the consensus estimate was US$4.55. The second-quarter guidance for revenue as well as margin exceeded market expectations. The services unit was bit of a disappointment as revenue jumped by 17 per cent to US$12.7-billion, but traders were expecting US$13.07-billion.” David Madden, analyst, CMC Markets

“The [Federal Open Market Committee] take centre stage today, with markets widely expecting to see the committee opt to hold off on any drastic action despite recent developments. Donald Trump’s criticism of the Fed in Davos is likely to strengthen the FOMC’s resolve, with markets pricing in a higher chance of a rate hike than a cut despite Trump’s calls for negative rates. As with any event where little change is expected, traders will be looking for any more nuanced shift in outlook from the Fed.” Joshua Mahony, senior market analyst, IG

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